We have blogged about Deloitte and Parmalat many times earlier. Parmalat, the Italian diary company plunged into spectacular bankruptcy in 2003 when it collapsed under a huge debt burden of EUR 14 Billion. Since then, the company restructured and relisted in 2005 in Milan Stock Exchange.
In early 2007, Deloitte settled this suit for $149 million with the new Parmalat company. But not so good news on the shareholder class-action suit.
Judge Lewis Kaplan of U.S. District Court for the Southern District of New York Judge ruled against Deloitte yesterday and rejected a summary judgment motion to dismiss the shareholder class-action suit against the Big4 firm.
This allows the Parmalat shareholder case to proceed against two Deloitte entities: the international firm of Deloitte & Touche Tohmatsu and the US firm of Deloitte & Touche LLP. Essentially, the judge is holding these two entities liable for the actions of Deloitte & Touche SpA, the Deloitte Italian firm, which was Parmalat's Italian auditor.
Arguing against this liability, Deloitte & Touche Tohmatsu said it did not exercise control over Deloitte Italy, and the US firm Deloitte & Touche LLP, contends that it did not control Deloitte & Touche Tohmatsu. Moreover, the firm claims that these two particular entities had nothing to do with the actions of the Italian firm, indicating "Deloitte US issued no audit reports on Parmalat and had nothing to do with Parmalat's alleged misconduct. In fact, the same judge has dismissed two complaints filed against Deloitte US for their audits of Parmalat's US operations. Deloitte Touche Tohmatsu is a Swiss Verein (membership association) and provided no services of any kind to any Parmalat entity.”
In Deloitte’s view, the US firm did not provide the audit opinion and the overarching global firm did not provide any services to the client. Thus, both should be insulated from any negative ramifications of the Deloitte Italian audit firm. Deloitte’s apparent strategy is to contain any legal issues within Italy and insulate all other Deloitte firms from any contagion. And Judge Kaplan’s recent ruling now overturns that defense.
The plaintiffs are clearly pleased with this outcome and Deloitte is disappointed but clearly hopeful based on all the public statements from these parties.
Philosophically, the larger question for all international audit firms is who is liable for audit risk, is the global partnership to be held accountable or is the risk to be contained only in the country partnership entity. Big4 firms are generally organized as coalition of partnerships. At a business level, services are provided seamlessly across country borders to clients which benefits both the firm and multinational companies. At a legal structure level, it looks to be not that clear. Firms would contend that the local partnership is really signing off on the audit, while client & shareholders would point to the global nature of services received, the one-firm pitch used to win the audit and the firms’ worldwide organization.
The heart of all this is money, of course, insulation means only local firm assets are at stake, while there is a larger and deeper pockets potentially available when the global firm is held responsible.
There is an eerie parallel to the Parmalat saga, PricewaterhouseCoopers India’s auditing of Satyam Computer Services is being subject to examination by Indian regulators. Class action suits have already been filed against PwC and Satyam. How will this ruling play into the plaintiff’s hands for that case? Will PwC Global be equally held culpable for the Indian firm’s audit opinion? This ruling may well set key future precedents.
Thursday, January 29, 2009
Saturday, January 24, 2009
Big Four Firms Honored by Fortune Magazine in 100 Best Companies List
All the Big Four firms have made it in the top 100 of Fortune Magazine’s 100 Best Companies to Work For in 2009. Not only have these firms made the list, they have also each moved up in rankings. Accenture, which did not even make the list last year, debuted at position 97.
Fortune follows a rigorous process to select the 100 Best. In their own words, “…we conduct the most extensive employee survey in corporate America. More than 81,000 employees from 353 companies responded to a 57-question survey created by the Great Place to Work Institute. Two-thirds of a company's score is based on the survey, which is sent to a minimum of 400 randomly selected employees. The remaining third is based on our Culture Audit, which includes detailed questions about demographics, pay, and benefits, and open-ended questions on philosophy, communication, etc. “
Top of the Big4 list is Ernst and Young at rank 51, moving up 6 ranks from previous rank of 57. What makes it so great? According to Fortune, one-quarter of all manager hires and above are "boomerangs," ex-employees who get credit for their previous time in computing vacation and retirement. One new benefit: zero costs for hospital stays.
Next in line is KPMG at rank 56, moving up 15 ranks from previous rank of 71. What makes it so great? Employees received wage hikes averaging 6.7% in October, while the accounting firm passed out bonuses totaling $108 million. Year-end gift was shelved in favor of a donation to a food bank.
In third place is PricewaterhouseCoopers at rank of 58, moving up a substantial 32 ranks from a previous rank of 90. What makes it so great? Dennis Nally, the audit firm's chairman, issued updates to employees, saying, "We have no plans to downsize, rightsize, or reduce our staffing levels."
Fourth among the Big Four accounting firms is Deloitte at rank of 61, moving up a huge 34 ranks from a previous rank of 95. What makes it so great? Women now hold 22% of top positions at this accounting firm, compared with 6% in 1993. Minorities account for 8% of top positions, vs. 4% in 1998.
Finally, debuting at rank 97 is Accenture, which did not even figure in the previous top 100 ranking. What makes it so great? Every employee of this consulting company is assigned a career counselor -- and he or she then has thousands of courses to choose from. Average training is 78 hours a year per person.
Congratulations to each of these firms for this creditable honor, it’s certainly not easy to make this list with tough competition, and moving up in ranks indicates that things are improving from an employee’s perspective, and something to be proud of all Big Four Alumni who have spent part of their careers at the top-notch firms.
Fortune follows a rigorous process to select the 100 Best. In their own words, “…we conduct the most extensive employee survey in corporate America. More than 81,000 employees from 353 companies responded to a 57-question survey created by the Great Place to Work Institute. Two-thirds of a company's score is based on the survey, which is sent to a minimum of 400 randomly selected employees. The remaining third is based on our Culture Audit, which includes detailed questions about demographics, pay, and benefits, and open-ended questions on philosophy, communication, etc. “
Top of the Big4 list is Ernst and Young at rank 51, moving up 6 ranks from previous rank of 57. What makes it so great? According to Fortune, one-quarter of all manager hires and above are "boomerangs," ex-employees who get credit for their previous time in computing vacation and retirement. One new benefit: zero costs for hospital stays.
Next in line is KPMG at rank 56, moving up 15 ranks from previous rank of 71. What makes it so great? Employees received wage hikes averaging 6.7% in October, while the accounting firm passed out bonuses totaling $108 million. Year-end gift was shelved in favor of a donation to a food bank.
In third place is PricewaterhouseCoopers at rank of 58, moving up a substantial 32 ranks from a previous rank of 90. What makes it so great? Dennis Nally, the audit firm's chairman, issued updates to employees, saying, "We have no plans to downsize, rightsize, or reduce our staffing levels."
Fourth among the Big Four accounting firms is Deloitte at rank of 61, moving up a huge 34 ranks from a previous rank of 95. What makes it so great? Women now hold 22% of top positions at this accounting firm, compared with 6% in 1993. Minorities account for 8% of top positions, vs. 4% in 1998.
Finally, debuting at rank 97 is Accenture, which did not even figure in the previous top 100 ranking. What makes it so great? Every employee of this consulting company is assigned a career counselor -- and he or she then has thousands of courses to choose from. Average training is 78 hours a year per person.
Congratulations to each of these firms for this creditable honor, it’s certainly not easy to make this list with tough competition, and moving up in ranks indicates that things are improving from an employee’s perspective, and something to be proud of all Big Four Alumni who have spent part of their careers at the top-notch firms.
Sunday, January 18, 2009
Tiger Woods May Return to Golf At High-Profile 2009 Accenture Championship
Accenture may be soon involved with exciting news in the world of golf!
Tiger Woods, the undisputed champion and uber-golf-player may use 2009 Accenture Match Play Championship in February 21-24, 2009 at Tuscon, AZ to mark his return to tournament play after his knee surgery in 2008.
Rumors are afloat that Tiger, winner of the 2008 Accenture Match Play Championship ($1.35 million purse beating Stewart Cink at Marana's Gallery Golf Club), and recuperating from a difficult injury after winning the US Open in Summer 2008.
Woods has not announced when he will return, but Doug Ferguson of the Associated Press reported Tuesday that Tiger "likely will make his '09 debut in Tucson," assuming "there is no swelling or other complications when he resumes a full practice routine."
"In a word, it would be huge," said Kenn Depew, general manager of the new Ritz-Carlton Golf Club club. "Positive because of Tiger's following, and he's the defending champion and No. 1-ranked player, and (Accenture) is worth the most points in world rankings other than the Masters.”
This would swing international golf attention to Tucson and on Accenture where 64 of the world's highest-ranked golfers will compete in the last week of February 2009, not to mention the huge publicity boost for the sponsor of the tournament, Accenture, Inc.
The Tiger Woods golf videos on Accenture’s home page may finally portend a spectacular return of golf’s prodigal son.
Tiger Woods, the undisputed champion and uber-golf-player may use 2009 Accenture Match Play Championship in February 21-24, 2009 at Tuscon, AZ to mark his return to tournament play after his knee surgery in 2008.
Rumors are afloat that Tiger, winner of the 2008 Accenture Match Play Championship ($1.35 million purse beating Stewart Cink at Marana's Gallery Golf Club), and recuperating from a difficult injury after winning the US Open in Summer 2008.
Woods has not announced when he will return, but Doug Ferguson of the Associated Press reported Tuesday that Tiger "likely will make his '09 debut in Tucson," assuming "there is no swelling or other complications when he resumes a full practice routine."
"In a word, it would be huge," said Kenn Depew, general manager of the new Ritz-Carlton Golf Club club. "Positive because of Tiger's following, and he's the defending champion and No. 1-ranked player, and (Accenture) is worth the most points in world rankings other than the Masters.”
This would swing international golf attention to Tucson and on Accenture where 64 of the world's highest-ranked golfers will compete in the last week of February 2009, not to mention the huge publicity boost for the sponsor of the tournament, Accenture, Inc.
The Tiger Woods golf videos on Accenture’s home page may finally portend a spectacular return of golf’s prodigal son.
Thursday, January 15, 2009
Deloitte: Record Pessimism in Global CFOs, High Future Uncertainty
Deloitte recently surveyed US Chief Financial Officers as part of a periodic quarterly initiative to understand how current stock market and economic environment is having an impact on their future expectations, concerns and plans for their companies.
The results are stunning, and by Deloitte’s own admission, “Last quarter was the first for this industry-based analysis, and our team was convinced at the time that we had just witnessed what would prove to be one of the most notable quarters in U.S. economic history. Then the fourth quarter hit, making the third seem rather mild by comparison.”
The survey group is fairly broad, 1,275 financial executives from a variety of global public and private companies. CFOs are more pessimistic now than they have ever been in 50-odd years of surveying, and we paraphrase from Deloitte’s findings:
Record pessimism
The US economy optimism index, already low for Q3-2008 at 54, fell even further to Q4-2008 to 42. A record 81% of US CFOs are more pessimistic about the economy in Q4, doubling the number from Q3. Interestingly, own-company optimism fell from 63 to 55. According to John R. Graham, director of the survey and a finance professor at Duke’s Fuqua School of Business: “….Throughout the history of our survey, CFOs have shown remarkable ability to predict future economic conditions. Therefore, the record pessimism CFOs are currently expressing is ominous.”
Falling earnings, spending and employment
Earnings are expected to decline 9% in 2009, and U.S. companies planning to reduce work forces by 5%, capital spending is expected to fall by 10%, tech spending by 4% and marketing/advertising spending by 7%. Fuqua finance professor Campbell Harvey, says, “Right now, job number one for CFOs is to make sure the firm survives – and they're taking drastic actions.”
Worries over consumer demand and credit markets
Weakening consumer demand is a top concern for CFOs, followed by credit markets and interest rates, financial services industry, housing market and the new Obama administration and Congress tied for third. Not surprisingly, concerns on fuel costs and nonfuel commodities dropped sharply.
Difficulty in forecasting results and managing morale
“The uncertainty about both near-term and long-term conditions has made it nearly impossible for executives to plan for the future,” said Kate O’Sullivan, senior writer at CFO Magazine.
Impact of financial market crisis
75% of firms say financial constraints have limited their ability to invest in profitable projects. 62% say they cannot access the credit they need, and half say the cost of credit is higher when they can access it.
All this does not sound good, CFOs are by nature conservative, so usually exude more pessimism than say CEOs or CMOs, but such a drop from quarter to quarter does not bode well for economic recovery. Deloitte has succinctly captured the mood of financial executives, who are being battered on all sides by tough economic conditions, inability to accurately forecast, falling morale, slowing demand, expense control among others. As the Duke professor says, CFOs have been pretty good at forecasting bad times, and this survey as it continues into the future should provide good evidence on when the bad mood clears and better prospects for global economies can be expected.
The results are stunning, and by Deloitte’s own admission, “Last quarter was the first for this industry-based analysis, and our team was convinced at the time that we had just witnessed what would prove to be one of the most notable quarters in U.S. economic history. Then the fourth quarter hit, making the third seem rather mild by comparison.”
The survey group is fairly broad, 1,275 financial executives from a variety of global public and private companies. CFOs are more pessimistic now than they have ever been in 50-odd years of surveying, and we paraphrase from Deloitte’s findings:
Record pessimism
The US economy optimism index, already low for Q3-2008 at 54, fell even further to Q4-2008 to 42. A record 81% of US CFOs are more pessimistic about the economy in Q4, doubling the number from Q3. Interestingly, own-company optimism fell from 63 to 55. According to John R. Graham, director of the survey and a finance professor at Duke’s Fuqua School of Business: “….Throughout the history of our survey, CFOs have shown remarkable ability to predict future economic conditions. Therefore, the record pessimism CFOs are currently expressing is ominous.”
Falling earnings, spending and employment
Earnings are expected to decline 9% in 2009, and U.S. companies planning to reduce work forces by 5%, capital spending is expected to fall by 10%, tech spending by 4% and marketing/advertising spending by 7%. Fuqua finance professor Campbell Harvey, says, “Right now, job number one for CFOs is to make sure the firm survives – and they're taking drastic actions.”
Worries over consumer demand and credit markets
Weakening consumer demand is a top concern for CFOs, followed by credit markets and interest rates, financial services industry, housing market and the new Obama administration and Congress tied for third. Not surprisingly, concerns on fuel costs and nonfuel commodities dropped sharply.
Difficulty in forecasting results and managing morale
“The uncertainty about both near-term and long-term conditions has made it nearly impossible for executives to plan for the future,” said Kate O’Sullivan, senior writer at CFO Magazine.
Impact of financial market crisis
75% of firms say financial constraints have limited their ability to invest in profitable projects. 62% say they cannot access the credit they need, and half say the cost of credit is higher when they can access it.
All this does not sound good, CFOs are by nature conservative, so usually exude more pessimism than say CEOs or CMOs, but such a drop from quarter to quarter does not bode well for economic recovery. Deloitte has succinctly captured the mood of financial executives, who are being battered on all sides by tough economic conditions, inability to accurately forecast, falling morale, slowing demand, expense control among others. As the Duke professor says, CFOs have been pretty good at forecasting bad times, and this survey as it continues into the future should provide good evidence on when the bad mood clears and better prospects for global economies can be expected.
Wednesday, January 14, 2009
PricewaterhouseCoopers Issues Statement, Change from Previous Stance
The Satyam Scam Saga continues, and much as we like to step away to other matters, there continues to be interesting new developments which catch our attention.
Now The Economic Times of India reports that PricewaterhouseCoopers sent a statement to the Bombay Stock Exchange and to the newly-constituted board of Satyam Computers, saying, “The former chairman has stated that the financial statements of the company have been inaccurate for successive years. The contents of the said letter, even if partially accurate, may have a material effect (which is currently unknown and cannot be quantified without thorough investigations) on the veracity of the company’s financial statements presented to us during the audit period. Consequently, our opinions on the financial statements may be rendered inaccurate and unreliable.”
Further, to comply with the local norms set by the Institute of Chartered Accountants of India, PricewaterhouseCoopers stated, “ICAI has issued a guidance note on the revision of audit reports in January 2003, which prescribes steps to be followed by the auditor to prevent reliance on audit report in such circumstances (inaccurate financial statements). In view of the contents of the (Satyam) chairman’s letter, we hereby, in accordance with the Guidance Note, state that our audit reports and opinions in relation to the financial statements for the audit period should no longer be relied upon.”
In another development, the Board selected Deloitte & Touche and KPMG as joint statutory auditors to replace PwC.
There is a fine line to walk here and perhaps a deeper question to debate. What exactly is PwC saying in their statement and what do they really mean? Does not the external auditor have the responsibility or authority to verify the “company’s financial statements presented to us during the audit period”? If these were not double checked against other internal or external documentation, is the auditor or the company to blame? This is a different stance than what PwC has been saying all this time, but is it really admission of guilt? We know that the financial statements are clearly wrong, but is the opinion of the auditors also equally “inaccurate and unreliable”?
In a similar circumstance in 2001, the inaccurate audit of Enron by a few Andersen personnel led to a criminal indictment by the Department of Justice of the United States at the instigation of the Bush Administration, leading the firm to complete dissolution. The travesty was the Supreme Court overturned the decision much after the firm was gone.
The Enron situation should provide some context to what should appropriately happen next, is the fault, if any, assignable to the Satyam audit personnel / to the PwC India firm / to the PwC Global firm? There are no clear answers, we have to wait on developments and the acts of all the parties involved.
Now The Economic Times of India reports that PricewaterhouseCoopers sent a statement to the Bombay Stock Exchange and to the newly-constituted board of Satyam Computers, saying, “The former chairman has stated that the financial statements of the company have been inaccurate for successive years. The contents of the said letter, even if partially accurate, may have a material effect (which is currently unknown and cannot be quantified without thorough investigations) on the veracity of the company’s financial statements presented to us during the audit period. Consequently, our opinions on the financial statements may be rendered inaccurate and unreliable.”
Further, to comply with the local norms set by the Institute of Chartered Accountants of India, PricewaterhouseCoopers stated, “ICAI has issued a guidance note on the revision of audit reports in January 2003, which prescribes steps to be followed by the auditor to prevent reliance on audit report in such circumstances (inaccurate financial statements). In view of the contents of the (Satyam) chairman’s letter, we hereby, in accordance with the Guidance Note, state that our audit reports and opinions in relation to the financial statements for the audit period should no longer be relied upon.”
In another development, the Board selected Deloitte & Touche and KPMG as joint statutory auditors to replace PwC.
There is a fine line to walk here and perhaps a deeper question to debate. What exactly is PwC saying in their statement and what do they really mean? Does not the external auditor have the responsibility or authority to verify the “company’s financial statements presented to us during the audit period”? If these were not double checked against other internal or external documentation, is the auditor or the company to blame? This is a different stance than what PwC has been saying all this time, but is it really admission of guilt? We know that the financial statements are clearly wrong, but is the opinion of the auditors also equally “inaccurate and unreliable”?
In a similar circumstance in 2001, the inaccurate audit of Enron by a few Andersen personnel led to a criminal indictment by the Department of Justice of the United States at the instigation of the Bush Administration, leading the firm to complete dissolution. The travesty was the Supreme Court overturned the decision much after the firm was gone.
The Enron situation should provide some context to what should appropriately happen next, is the fault, if any, assignable to the Satyam audit personnel / to the PwC India firm / to the PwC Global firm? There are no clear answers, we have to wait on developments and the acts of all the parties involved.
Tuesday, January 13, 2009
KPMG Says Global M&A to Fall in 2009, Late Year Pickup Possible
2007 was clearly the peak of global M&A, with private equity and strategic buyers in full force, strong capital markets and supportive debt structures freely offered by commercial banks. But what a difference a year makes!
KPMG Corporate Finance's Global M&A Predictor expects that 2009 will continue to have a decrease in global mergers and acquisitions (M&A) activity, but with some activity returning in late 2009 as liquidity improves and attractive value becomes recognized in certain sectors.
The latest Predictor, which is really a forward-looking survey of 1,000 leading companies’ estimated net debt to EBITDA ratios and prospective Price Earnings ratios, shows a large fall in 12-month forward corporate valuations, which leads to a decreased deal appetite. Consider that global deals’ multiples were down 22.2% percent from 15.3x in May 2008 to 11.9x in November 2008. Looking forward, forecast Net debt to EBITDA ratios have decreased from 0.93 times to 1.06 times, a 13.5% deterioration, indicating that companies have a decreasing capacity to enact M&A deals.
KPMG’s Predictor has been fairly good in calling deal volume. In June 2007, KPMG called the top of the M&A market, after which there was significant decline in the average value in deals. In January 2008, the Predictor indicated lowered appetite for deals and a deterioration in deal capacity. But by late 2009, things change with deal appetite improving as cash-rich investors begin to like deep value in the market; and this may be one of the positive indicators to indicate an upturn in the broader economy.
For the first time, the Predictor indicates a declining valuation trend in all regions of the world, showing a global decline in M&A activity. Africa and Middle East suffered the most, followed by Latin America, and North America. Drops in Europe and Asia Pacific were relatively moderate.
Balance sheets in Latin America and Africa and the Middle East actually improved, and Europe fell. Asia Pacific deteriorated the most, showing this region is being hurt the most. There appears more hope in North America and Latin America, indicating companies may do deals opportunistically. Expectations for Europe are modest.
In terms of sectors, the Predictor has shown a decline in forward PE valuation across all sectors, with Technology, Basic Materials and Industrials, expectedly leading the list.
According to Stephen Barrett, Corporate Finance International Chairman at KPMG, “Findings from our latest Predictor confirm our view that 2009 will be a very subdued year for M&A activity. We expect global deal volumes to continue to fall through to Q3 and, with less liquidity in the market and reduced debt market liquidity, appetite and capacity for doing deals will continue to decline. However, our detailed analysis of the results of KPMG’s Predictor, coupled with historic M&A cycle trends, leads us to believe that there are indications that the corner may well be turned late in the second half of this year….
KPMG Corporate Finance's Global M&A Predictor expects that 2009 will continue to have a decrease in global mergers and acquisitions (M&A) activity, but with some activity returning in late 2009 as liquidity improves and attractive value becomes recognized in certain sectors.
The latest Predictor, which is really a forward-looking survey of 1,000 leading companies’ estimated net debt to EBITDA ratios and prospective Price Earnings ratios, shows a large fall in 12-month forward corporate valuations, which leads to a decreased deal appetite. Consider that global deals’ multiples were down 22.2% percent from 15.3x in May 2008 to 11.9x in November 2008. Looking forward, forecast Net debt to EBITDA ratios have decreased from 0.93 times to 1.06 times, a 13.5% deterioration, indicating that companies have a decreasing capacity to enact M&A deals.
KPMG’s Predictor has been fairly good in calling deal volume. In June 2007, KPMG called the top of the M&A market, after which there was significant decline in the average value in deals. In January 2008, the Predictor indicated lowered appetite for deals and a deterioration in deal capacity. But by late 2009, things change with deal appetite improving as cash-rich investors begin to like deep value in the market; and this may be one of the positive indicators to indicate an upturn in the broader economy.
For the first time, the Predictor indicates a declining valuation trend in all regions of the world, showing a global decline in M&A activity. Africa and Middle East suffered the most, followed by Latin America, and North America. Drops in Europe and Asia Pacific were relatively moderate.
Balance sheets in Latin America and Africa and the Middle East actually improved, and Europe fell. Asia Pacific deteriorated the most, showing this region is being hurt the most. There appears more hope in North America and Latin America, indicating companies may do deals opportunistically. Expectations for Europe are modest.
In terms of sectors, the Predictor has shown a decline in forward PE valuation across all sectors, with Technology, Basic Materials and Industrials, expectedly leading the list.
According to Stephen Barrett, Corporate Finance International Chairman at KPMG, “Findings from our latest Predictor confirm our view that 2009 will be a very subdued year for M&A activity. We expect global deal volumes to continue to fall through to Q3 and, with less liquidity in the market and reduced debt market liquidity, appetite and capacity for doing deals will continue to decline. However, our detailed analysis of the results of KPMG’s Predictor, coupled with historic M&A cycle trends, leads us to believe that there are indications that the corner may well be turned late in the second half of this year….
Monday, January 12, 2009
Satyam Scam – New Details Emerge Frequently, PwC Still in Focus
The Satyam Scam appears to be unfolding with news coming out so often that the Economic Times of India has a scroll bar with news marked by the minute. Given that the scandal hinges on non-existent cash on the balance sheet, and the lack of adequate controls and checks and balances on this, statutory auditors PricewaterhouseCoopers appears to be right in the middle of this situation.
Indian news reports that the CEO Ramalinga Raju kept tight control over the balance sheet and the CFO Srinivas Vadlamani focused mainly on the income statement. This is not a good set of controls, and the result of the inappropriateness is glaringly evident. There is a growing sense of outrage in Indian business circles with even the Indian government and top regulatory bodies getting intimately involved in deciding events and courses of action.
PwC has maintained that the audit was correctly done per regulations, and pointed to client confidentiality. “The audits were conducted in accordance with applicable auditing standards and were supported by appropriate audit evidence,” says the firm.
The focus now seems to be on how bank reconciliation statements of the company’s actual cash in its banking accounts was not fully verified. Further investigations of the situation specifics are needed to find this answer, and we’ll report on it as news flows.
Indian news reports that the CEO Ramalinga Raju kept tight control over the balance sheet and the CFO Srinivas Vadlamani focused mainly on the income statement. This is not a good set of controls, and the result of the inappropriateness is glaringly evident. There is a growing sense of outrage in Indian business circles with even the Indian government and top regulatory bodies getting intimately involved in deciding events and courses of action.
PwC has maintained that the audit was correctly done per regulations, and pointed to client confidentiality. “The audits were conducted in accordance with applicable auditing standards and were supported by appropriate audit evidence,” says the firm.
The focus now seems to be on how bank reconciliation statements of the company’s actual cash in its banking accounts was not fully verified. Further investigations of the situation specifics are needed to find this answer, and we’ll report on it as news flows.
Saturday, January 10, 2009
PwC Global CEO Reportedly In India to Deal with Satyam Situation
Reports from the Indian press are that the Satyam Scam has drawn the top leadership of PricewaterhouseCoopers to India to deal with the situation. It appears that PwC Global CEO Samuel DiPiazza, Jr., along with some senior worldwide partners are in India to assess and deal with any regulatory and reputational fallout from this scandal. PricewaterhouseCoopers were Satyam Computers’ external auditors and signed off on the company’s latest financial statement which is purported to contain $1 billion of “fictitious cash”
Indian business press is also reporting that senior management at the PwC Indian firm is likely to be reshuffled. This may involve the CEO of the Indian unit and other top partners. PwC appears to be serious about the Indian firm which had reported revenues of Indian Rupees 8,000,000,000 or $160 million in US Dollars and 140 large blue-chip companies as clients.
The oversight body for public accountants in India Institute of Chartered Accountants of India (ICAI) through V Murali, a member of its Central Council said in the press that confidentiality could not be held up as a screen at least in this high-profile situation, "The confession of accounting fraud of a huge magnitude is an extraordinary situation. The auditor who certified the company's accounts or the firm in which he is a partner cannot hide under client confidentiality clause."
Indian business press is also reporting that senior management at the PwC Indian firm is likely to be reshuffled. This may involve the CEO of the Indian unit and other top partners. PwC appears to be serious about the Indian firm which had reported revenues of Indian Rupees 8,000,000,000 or $160 million in US Dollars and 140 large blue-chip companies as clients.
The oversight body for public accountants in India Institute of Chartered Accountants of India (ICAI) through V Murali, a member of its Central Council said in the press that confidentiality could not be held up as a screen at least in this high-profile situation, "The confession of accounting fraud of a huge magnitude is an extraordinary situation. The auditor who certified the company's accounts or the firm in which he is a partner cannot hide under client confidentiality clause."
Thursday, January 08, 2009
Ernst & Young ex-CEO Becomes Ombudsman at Standard and Poors
The McGraw-Hill Companies (NYSE:MHP.N) named financial services veteran and former CEO of Ernst and Young, Mr. Ray Groves as Ombudsman for its Standard & Poor's (S&P) unit. This is part of a larger plan to improve the rating process and boost transparency, and restore confidence in the accuracy of its credit ratings.
Investors and regulators have taken the key national credit rating agencies, including Moody's Corp's (MCO.N) Moody's Investors Service and Fimalac SA's (LBCP.PA) Fitch Ratings, to task for inappropriately giving high ratings to mortgage and other complex securities till 2007.
In his new role, Groves will field complaints from inside and outside S&P, and make annual reports to the public. He will report to CEO Harold "Terry" McGraw and be accountable to the audit committee of the McGraw-Hill board of directors.
Groves previously worked for 37 years at Ernst & Young, including 17 as chairman and chief executive prior to his 1994 retirement.
The Ombudsman will listen to and address issues and concerns raised from both within or outside the company confidentially, while also ensuring that all channels within the company are effectively utilized to resolve those issues. This will allow the Office of the Ombudsman to offer a balanced and independent approach to resolution.
S&P had announced changes to its ratings models and methods, and recently discussed at least 27 initiatives including hiring an ombudsman, demanding disclosure of collateral in structured- finance securities, changing risk measures, and preventing analysts from covering issuers for more than five years.
Analysts and investors welcomed this move, but did not see it as a complete panacea, but it is certainly a step in the right direction to have an independent third-party who can sort out issues without partisanship and being wrongly influenced by the excess profit motive. Of course, the choice of such an experienced and senior alumni of the Big4 for an important endeavor is always a source of pride.
Investors and regulators have taken the key national credit rating agencies, including Moody's Corp's (MCO.N) Moody's Investors Service and Fimalac SA's (LBCP.PA) Fitch Ratings, to task for inappropriately giving high ratings to mortgage and other complex securities till 2007.
In his new role, Groves will field complaints from inside and outside S&P, and make annual reports to the public. He will report to CEO Harold "Terry" McGraw and be accountable to the audit committee of the McGraw-Hill board of directors.
Groves previously worked for 37 years at Ernst & Young, including 17 as chairman and chief executive prior to his 1994 retirement.
The Ombudsman will listen to and address issues and concerns raised from both within or outside the company confidentially, while also ensuring that all channels within the company are effectively utilized to resolve those issues. This will allow the Office of the Ombudsman to offer a balanced and independent approach to resolution.
S&P had announced changes to its ratings models and methods, and recently discussed at least 27 initiatives including hiring an ombudsman, demanding disclosure of collateral in structured- finance securities, changing risk measures, and preventing analysts from covering issuers for more than five years.
Analysts and investors welcomed this move, but did not see it as a complete panacea, but it is certainly a step in the right direction to have an independent third-party who can sort out issues without partisanship and being wrongly influenced by the excess profit motive. Of course, the choice of such an experienced and senior alumni of the Big4 for an important endeavor is always a source of pride.
Satyam’s Statutory Auditor PwC Embroiled in Huge Satyam Scam
Public auditing can potentially create risk for Big4 firms.
PricewaterhouseCoopers is now facing such risk as the statutory auditor of Indian technology outsourcer Satyam Computer Services in yesterday’s blowup of the “Satyam Scam”, or as it being labeled, India’s Enron.
Satyam’s Founder-Chairman Ramalinga Raju recently confessed to “fictitious cash” of around $1 billion in a letter to the company’s Board of Directors, sending the stock down nearly 90% and the entire Indian stock market down 7%, with ripples hitting Satyam’s client and the technology outsourcing sector in every corner of the world.
All of Satyam’s financial statements for the year ending March 31, 2008 were audited by PricewaterhouseCoopers. In a prior statement, PwC said that "We have learnt of the disclosure made by the Chairman of Satyam Computer Services and are currently examining the contents of the statement. We are not commenting further on this subject due to issues of client confidentiality."
In a further statement released today, PwC maintains its innocent posture, saying in a statement, "Over the last two days, there have been media reports with regard to alleged irregularities in the accounts of Satyam Computer Services. The audits were conducted by Price Waterhouse in accordance with applicable auditing standards and were supported by appropriate audit evidence. Given our obligations for client confidentiality, it is not possible for us to comment upon the alleged irregularities. Price Waterhouse will fully meet its obligations to cooperate with the regulators and others."
Reportedly, The Institute of Chartered Accountants of India (ICAI), the regulatory body for Indian Chartered Accountants has suo motu initiated disciplinary proceedings against the PricewaterhouseCoopers Indian firm. Further, an independent disciplinary committee to be chaired by ICAI president Ved Jain had been already directed to initiate action against PwC.
This looks a lot like Parmalat, the Italian dairy company whose auditor Deloitte & Touche got embroiled in extensive lawsuits and payments as it roiled into bankruptcy. These are surely tough times for PwC, and we will be monitoring developments in this saga as it unfolds.
PricewaterhouseCoopers is now facing such risk as the statutory auditor of Indian technology outsourcer Satyam Computer Services in yesterday’s blowup of the “Satyam Scam”, or as it being labeled, India’s Enron.
Satyam’s Founder-Chairman Ramalinga Raju recently confessed to “fictitious cash” of around $1 billion in a letter to the company’s Board of Directors, sending the stock down nearly 90% and the entire Indian stock market down 7%, with ripples hitting Satyam’s client and the technology outsourcing sector in every corner of the world.
All of Satyam’s financial statements for the year ending March 31, 2008 were audited by PricewaterhouseCoopers. In a prior statement, PwC said that "We have learnt of the disclosure made by the Chairman of Satyam Computer Services and are currently examining the contents of the statement. We are not commenting further on this subject due to issues of client confidentiality."
In a further statement released today, PwC maintains its innocent posture, saying in a statement, "Over the last two days, there have been media reports with regard to alleged irregularities in the accounts of Satyam Computer Services. The audits were conducted by Price Waterhouse in accordance with applicable auditing standards and were supported by appropriate audit evidence. Given our obligations for client confidentiality, it is not possible for us to comment upon the alleged irregularities. Price Waterhouse will fully meet its obligations to cooperate with the regulators and others."
Reportedly, The Institute of Chartered Accountants of India (ICAI), the regulatory body for Indian Chartered Accountants has suo motu initiated disciplinary proceedings against the PricewaterhouseCoopers Indian firm. Further, an independent disciplinary committee to be chaired by ICAI president Ved Jain had been already directed to initiate action against PwC.
This looks a lot like Parmalat, the Italian dairy company whose auditor Deloitte & Touche got embroiled in extensive lawsuits and payments as it roiled into bankruptcy. These are surely tough times for PwC, and we will be monitoring developments in this saga as it unfolds.
Wednesday, January 07, 2009
Deloitte Alum Appointed to Top SEC Post
James L. Kroeker, an ex-partner at Deloitte and Touche LLP’s National Office Accounting Services Group, responsible for providing consultation and support regarding the implementation, application, communication and development of accounting standards, including disclosure and reporting matters was named Acting Chief Accountant by SEC Chairman Christopher Cox.
In this important role, Mr. Kroeker will oversee accounting interpretations, international accounting matters, and professional practice issues. The SEC has been under increasing scrutiny and pressure owing to its role in the US credit crunch and more recently in the Madoff Ponzi-scheme scandal. Congress is likely to extensively revamp the entire SEC structure, role and responsibilities to bring uniformity and congruence of regulation across the financial system.
In such a situation, the role of Chief Accountant of the SEC assumes significance owing to the critical nature of interpretation of accounting standards and professional practice conformance, and it is fitting that Big Four alum has been entrusted with this high responsibility in such troubling times.
In this important role, Mr. Kroeker will oversee accounting interpretations, international accounting matters, and professional practice issues. The SEC has been under increasing scrutiny and pressure owing to its role in the US credit crunch and more recently in the Madoff Ponzi-scheme scandal. Congress is likely to extensively revamp the entire SEC structure, role and responsibilities to bring uniformity and congruence of regulation across the financial system.
In such a situation, the role of Chief Accountant of the SEC assumes significance owing to the critical nature of interpretation of accounting standards and professional practice conformance, and it is fitting that Big Four alum has been entrusted with this high responsibility in such troubling times.
Tuesday, January 06, 2009
Big Four Firms Combined Revenues Top $100B, Employment Nearly 600,000!
With KPMG being the last firm to reports its 2008 performance, we can now complete the full financial picture for all the Big Four firms in 2008. The five years from 2004 to 2008 have been some of the best growth years for these firms. In a strong economic environment, with rapid development in the BRIC nations and solid growth in emerging markets, the Big Four firms capitalized on demand for global financial and accounting services to boost their top line and posting a string of back-to-back record performances. Their worldwide reach and ability to offer complex seamless and multi-country services, coupled with need for name-brand public accountants enabled them to grow all their service lines, especially Audit boosted by Sarbanes Oxley regulations in the United States. Growth in Brazil, Russia, India and China was reported at nearly 30+ % each year, as these economies expressed their latent need for professional services.
In 2008, the combined revenues of the Big4 firms, Deloitte & Touche, Ernst & Young, KPMG and PricewaterhouseCoopers crossed a major landmark – the $100 billion barrier. 2008 revenues were a solid $103 billion, up 15.4% from 2007, and capping a streak of sequential double digit revenue increases each year since 2004, when the combined revenue was only $60 billion. All firms have enjoyed tremendous growth in emerging markets of China, India, Brazil and Russia, great performance in the Asia Pacific region and high growth in Europe, which have more than offset modest increases in their home country of the United States.
Asia turned out to be the fastest growth region for every Big 4 firm, with a large proportion of emerging markets in the continent. The Asia region for the Big Four firms nearly doubled from 2004 to 2006, and Asia’s share of total revenues increased from 12% to 13% in this period. Surprisingly, the European region continues to be the largest geographic region for the Big Four firms. Europe accounted in 2008 for 48% of total combined revenues, up from 46% in 2004. America’s share slipped considerably, dropping from 42% of combined total revenues in 2004 to 39% of combined total revenues in 2008. Highly-developed countries of US and Canada had more modest needs for professional services provided by the Big Four firms.
The traditional mix of the Big Four firms moved slightly away from pure audit to more tax and advisory services as they increased revenues at a faster clip. By service line, combined Audit revenue for 2008 was $53 billion, 52% of the total combined revenue, slipping 2% from its 54% share in 2006. Combined Tax revenue was $25 billion, 25% of the total in 2008, rising 2% from 23% in 2006. Advisory services accounted for $26 billion, 25% of total in 2008, rising 2% from 23% in 2006.
The Big4 firms employed a staggering 590,000 professionals in 2008, increasing from 435,000 in 2004, providing a net employment increase of 155,000 in just five years. In 2008, of this, there were 33,580 global partners, 443,522 professionals and 112,817 administrative personnel. Partners are placed atop a steep pyramid in these firms, partners comprised only 5.7% of total employees, professionals being the bulk at 76% and support staff comprising the balance at 19%. The Big4 firms continue to push the professionals to partner ratio, which has increased sharply from 11.1 in 2004 to 13.2 in 2008. Not only do partners manage a larger set of professionals, they are also expected to bring in larger chunks of client business, with revenue per partner rising from $2.1 million in 2004 to $3.1 million in 2008.
KPMG’s financial year ended in September 2008, a full one quarter after the other firms, and it felt more the crushing weight of the global financial credit crunch. Despite this, its revenue increased 15.4%, somewhat slower than Ernst & Young and Deloitte & Touche, but creditable nonetheless. PricewaterhouseCoopers continues to be the largest firm by revenue, with Deloitte close behind by only $800 million, conceivably Deloitte could become the top dog in a short while if it keeps up its strong rate of growth. Thus, 2009 promises to be an interesting year both for growth prospects and for gaining the top spot.
Undoubtedly, as a group, the Big Four firms occupy a significant position on the global economic landscape, with $100+ revenues, high profitability, deep global reach and as a large employer of highly talented professionals. This year has provided us with quite unbelievable numbers and the party does not seem to be over yet.
In 2008, the combined revenues of the Big4 firms, Deloitte & Touche, Ernst & Young, KPMG and PricewaterhouseCoopers crossed a major landmark – the $100 billion barrier. 2008 revenues were a solid $103 billion, up 15.4% from 2007, and capping a streak of sequential double digit revenue increases each year since 2004, when the combined revenue was only $60 billion. All firms have enjoyed tremendous growth in emerging markets of China, India, Brazil and Russia, great performance in the Asia Pacific region and high growth in Europe, which have more than offset modest increases in their home country of the United States.
Asia turned out to be the fastest growth region for every Big 4 firm, with a large proportion of emerging markets in the continent. The Asia region for the Big Four firms nearly doubled from 2004 to 2006, and Asia’s share of total revenues increased from 12% to 13% in this period. Surprisingly, the European region continues to be the largest geographic region for the Big Four firms. Europe accounted in 2008 for 48% of total combined revenues, up from 46% in 2004. America’s share slipped considerably, dropping from 42% of combined total revenues in 2004 to 39% of combined total revenues in 2008. Highly-developed countries of US and Canada had more modest needs for professional services provided by the Big Four firms.
The traditional mix of the Big Four firms moved slightly away from pure audit to more tax and advisory services as they increased revenues at a faster clip. By service line, combined Audit revenue for 2008 was $53 billion, 52% of the total combined revenue, slipping 2% from its 54% share in 2006. Combined Tax revenue was $25 billion, 25% of the total in 2008, rising 2% from 23% in 2006. Advisory services accounted for $26 billion, 25% of total in 2008, rising 2% from 23% in 2006.
The Big4 firms employed a staggering 590,000 professionals in 2008, increasing from 435,000 in 2004, providing a net employment increase of 155,000 in just five years. In 2008, of this, there were 33,580 global partners, 443,522 professionals and 112,817 administrative personnel. Partners are placed atop a steep pyramid in these firms, partners comprised only 5.7% of total employees, professionals being the bulk at 76% and support staff comprising the balance at 19%. The Big4 firms continue to push the professionals to partner ratio, which has increased sharply from 11.1 in 2004 to 13.2 in 2008. Not only do partners manage a larger set of professionals, they are also expected to bring in larger chunks of client business, with revenue per partner rising from $2.1 million in 2004 to $3.1 million in 2008.
KPMG’s financial year ended in September 2008, a full one quarter after the other firms, and it felt more the crushing weight of the global financial credit crunch. Despite this, its revenue increased 15.4%, somewhat slower than Ernst & Young and Deloitte & Touche, but creditable nonetheless. PricewaterhouseCoopers continues to be the largest firm by revenue, with Deloitte close behind by only $800 million, conceivably Deloitte could become the top dog in a short while if it keeps up its strong rate of growth. Thus, 2009 promises to be an interesting year both for growth prospects and for gaining the top spot.
Undoubtedly, as a group, the Big Four firms occupy a significant position on the global economic landscape, with $100+ revenues, high profitability, deep global reach and as a large employer of highly talented professionals. This year has provided us with quite unbelievable numbers and the party does not seem to be over yet.
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